European Carmakers Confront Overcapacity as Sales Decline
Major manufacturers including Ford, Opel, Fiat and Peugeot Citroën are facing mounting losses as European car plants run well below capacity and sales continue to fall.
Carmakers across Europe are under pressure as factory overcapacity combines with falling demand, forcing manufacturers including Ford, Opel, Fiat and PSA Peugeot Citroën to consider plant closures and job cuts. Consultancy AlixPartners estimates that 40 percent of European plants are now operating below their financial breakeven point, with some facilities running at just over half their intended capacity.
Ford reported a $190 million loss overseas in the first quarter of 2012, most of it attributed to Europe. The company warned that second-quarter losses could reach $570 million, with Morgan Stanley analysts noting Ford’s European plants were running at just 63 percent of capacity. Opel, General Motors’ European division, operated at 77 percent capacity and posted a $361 million operating loss in Europe for the quarter, reversing a profit from the previous year. Production in the region fell 29 percent year-on-year to 230,000 vehicles, and Opel’s market share slipped to 8.8 percent.
Fiat’s factories in Italy are in an even more precarious position, with capacity utilisation at just 53 percent according to AlixPartners. Fiat’s regional loss before interest, tax and one-off items reached €184 million ($226 million) in the latest statement. The company’s chief executive warned that another Italian plant could close if further cost concessions are not made by workers.
PSA Peugeot Citroën announced a first-half loss of €662 million at its automotive division and set out plans to cut 8,000 jobs. The group’s struggles have made it the first major European manufacturer to take decisive action on overcapacity, with further cuts possible. For more on PSA’s workforce reductions, see PSA Peugeot Citroën to Cut 5,000 European Jobs Amid Cost Pressures.
Falling sales and the scale of the problem
New car registrations in the European Union dropped by 2.8 percent in June 2012, marking the ninth consecutive month of decline, according to the European Automobile Manufacturers Association. Registrations fell to just over 1.2 million vehicles, a level not seen since the mid-1990s. IHS Automotive estimated the region’s excess capacity at around two million vehicles, with the worst-affected plants located in France, Italy and Spain, but also in Russia and Turkey.
The combination of persistent overcapacity and weak demand has left manufacturers with little choice but to consider drastic restructuring. The industry’s financial pain is already visible in job losses, idled lines and shrinking market share. While PSA and Fiat have started to act, analysts expect further plant closures and redundancies unless demand recovers.
Impact on workers and suppliers
The consequences of overcapacity extend beyond the carmakers themselves. Plant closures and production cuts threaten jobs not only in assembly plants but also throughout the supply chain. PSA’s plan to eliminate 8,000 jobs is the first major move, but further cuts are likely if other manufacturers follow suit. Suppliers in affected regions face uncertainty as reduced output means less demand for components and services.
With no sign of a quick sales rebound, Europe’s car industry faces a prolonged period of adjustment. The next steps from Ford, Opel, Fiat and others will determine how quickly the region’s chronic overcapacity is addressed, and how much pain will be felt by workers and suppliers across the continent.
